Time Magazine
Monday, Apr. 08, 1985
General Dynamics Under Fire
By Charles P. Alexander.
At first glance, David S. Lewis would seem to hold one of the most enviable positions in corporate America. As chairman of St. Louis-based General Dynamics, he presides over the top U.S. defense contractor and No. 1 beneficiary of the Reagan military buildup. Megabuck contracts to build weapons such as the Trident nuclear-missile submarine, F-16 fighter plane and M-1 tank helped General Dynamics reap revenues last year of $7.8 billion and profits of $382 million, up 33% from 1983.
Yet Lewis these days could hardly be more uncomfortable if he were the target of a barrage of his company Tomahawk cruise missiles. Fleets of investigators and critics are challenging General Dynamics' integrity and its fitness to be a pillar of the nation's defense, raising charges far more extensive than those leveled against General Electric last week. The Pentagon attack on General Dynamics' expense reports and the Justice Department probe into overruns on the company's SSN 688 Los Angeles-class submarines are only the most publicized of many investigations. The Securities and Exchange Commission is studying whether the company may have manipulated its stock price, and the Defense Department is looking into possible national security violations.
For the second time in a month, Lewis was publicly grilled last week by a House Energy and Commerce subcommittee chaired by Michigan Democrat John Dingell. Among other things, Dingell and his colleagues demanded to know why General Dynamics charged the Government for such "overhead" costs as a $14,975 party at a suburban Washington country club and the babysitting expenses of one of its officials. Lewis admitted that some of the billings were improper and announced that General Dynamics was withdrawing $23 million | of its expense claims for the period from 1979 to 1982, or about one-third of the $64 million the Pentagon's Defense Contract Audit Agency is questioning.
Another accusation made during the House hearing was that General Dynamics had discussed a submarine deal with a top Navy official while simultaneously talking to him about his leaving the Pentagon and coming to work for the company. Lewis revealed that in March 1983 he telephoned George Sawyer, an Assistant Secretary of the Navy. Having heard that Sawyer intended to take a job in private industry, Lewis suggested that the official might want to learn more about General Dynamics. Later that month Sawyer spent a day at the company's St. Louis headquarters. On May 3 Lewis called Sawyer to say that General Dynamics had "developed a job that we thought he might be interested in that would have no conflict of interest." All the while, Sawyer was continuing his official dealings with General Dynamics, and on May 5 he authorized the Navy to negotiate a sub-building contract with the company. In June he became an executive vice president of General Dynamics. Responding to criticism of the Sawyer affair, Lewis contended that General Dynamics had not started job negotiations with Sawyer until after he had disqualified himself from doing Pentagon business with the company. Sawyer has denied that there was any conflict of interest.
For a decade, critics have charged that the actions of General Dynamics exemplify the greed and mismanagement they think pervades the defense industry. A federal grand jury first started investigating the company's cost overruns on submarines in 1979, but dropped the probe in 1981 for lack of enough evidence of fraud. Now the Justice Department has reopened the case in light of new information from P. Takis Veliotis, who in 1977 became head of Electric Boat, the company's sub-building division in Groton, Conn. His word is hardly unimpeachable. In 1983 he fled to his native Greece to avoid being tried on charges of perjuring himself before a grand jury and taking $1.3 million in kickbacks from a subcontractor (see box). Veliotis has produced tapes and company documents that he claims reveal a pattern of waste, corruption and cover-up at General Dynamics. In a tape of one talk he had with Lewis, for example, the chairman suggests that Veliotis reassure James Ashton, a discontented Electric Boat executive, that he is still in the running for a promotion in order to keep him from "popping off" about shoddy work at the yard.
Lewis maintains that Veliotis' tapes are unreliable evidence and his accusations merely a personal vendetta against his old bosses. Said the chairman to the Dingell committee: "It is incomprehensible that the word of Veliotis, indicted for lying under oath, has been so eagerly accepted by newsmen and investigators, while accurate explanations given by General Dynamics people have been largely ignored."
The charges that Veliotis and investigators have made against the company, none yet proved in court, constitute a catalog of almost every type of chicanery that critics say is rampant in the defense industry. Among the allegations:
-- Dubious Government billings. In 1982 alone, General Dynamics asked the Pentagon to pay $18.9 million in overhead costs run up by company headquarters. Among the charges: $491,840 for Lewis' personal flights on corporate jets, often to and from his farm in Albany, Ga.; $538,781 for contributions and memberships, including country-club fees for top executives; and $155 for the kenneling of a dog named Fursten while its owner, a General Dynamics executive, attended a company conference at a South Carolina resort. At last week's hearing, Dingell quizzed Lewis about a $571.25 charge for a king-size Serta Perfect Sleeper mattress and box-spring set, which was delivered to the Clayton Inn in suburban St. Louis. "It was for Mr. Veliotis," said Lewis, who explained that the executive said he needed the bed for the times he came to St. Louis for meetings. Added Gorden MacDonald, a General Dynamics executive vice president: "Mr. Veliotis, being a very large man, complained so much to the secretary of the company that he got tired of hearing it and bought the bed." Veliotis denied that the bed was for him.
-- Questionable entertainment and gifts. In 1982 General Dynamics headquarters maintained a $1.24 million account, which was used, against Government rules, to entertain Pentagon officials. Gifts have flowed freely. In 1977 General Dynamics gave a pair of diamond earrings worth $1,125 to the wife of Admiral Hyman Rickover, who until 1981 headed the Navy's nuclear-propulsion program. The company argues that the gift was made with no "intent" to get favors in return.
-- Stock manipulation. Veliotis has given the Justice Department a 1977 tape of a talk he had with MacDonald. In it, MacDonald told Veliotis that the company had decided to issue an overly optimistic delivery timetable for the + first Trident submarine because Lewis wanted "to keep our stock price from sliding." The sub was eventually finished in 1981, two years behind the original schedule.
-- National security violations. The Pentagon is looking into allegations of lax security at meetings of the General Dynamics board of directors, where top-secret subjects are supposedly discussed without adequate safeguards against leaks. Questions have been raised about how Veliotis, after leaving the company and losing his security clearance, obtained classified photographs of the interior of the newest Trident. Veliotis has turned over the sensitive pictures, which Soviet engineers could use to gauge the Trident's capabilities, to the Justice Department.
-- Questionable payments to foreigners. Representative Ron Wyden, an Oregon Democrat, asked Lewis last week about "a whole host of questionable payments being made overseas," including a $250,000 annual fee to a South Korean consultant. Lewis vehemently denied that the money was being funneled to the South Korean government as a bribe to win contracts for F-16 fighters. The chairman rejected a charge made by Veliotis that he had received permission from Lewis to go after contracts to sell natural-gas tankers to Burma and Indonesia by offering kickbacks of $1 million a ship. "I have absolutely no knowledge of that," Lewis said.
The most vivid example of the problems at General Dynamics can be seen in the decade-long controversy surrounding its work on the Navy's crucial nuclear-powered SSN 688 attack submarines. In 1971 the company won a contract for seven of the submarines with a bid of $61 million each. In an interview with TIME, Veliotis maintained that the bid was absurd from the beginning. Said he: "Electric Boat completely underestimated the difficulties and costs of building an entirely new sub."
The company quickly began to suffer cost overruns. Even so, in 1973 Electric Boat offered to build eleven more attack submarines for only $77 million each, which, adjusted for inflation, was roughly the same price as that of the first seven ships. Veliotis claims that General Dynamics' management knew it would never come close to the $77 million cost. The bid, he says, projected that it would take only about 4.5 million man-hours to build each sub, even though experience with the first set had shown that 6 million man-hours was more realistic.
In 1976 General Dynamics filed a claim with the Navy for $843 million in current and projected cost overruns on the attack-sub program. That worked out to a staggering $46 million surcharge on average for each of the 18 boats. The company contended that costs ballooned primarily because of design changes imposed by the Navy. But Veliotis says that most of the changes were requested by the company and that gross mismanagement was the real culprit. When he took over Electric Boat in 1977, he found the shipyard to be plagued by poor supervision, sluggish productivity and chronic absenteeism.
The Navy was not eager to pay the $843 million extra charge, but General Dynamics threatened to halt production of the submarines if the Pentagon refused to absorb the overrun. Company documents reveal that Lewis told Assistant Navy Secretary Edward Hidalgo that "it might well become necessary to close down those operations at Electric Boat relating to the 688 program." Charges Veliotis: "General Dynamics was prepared to hold the nation's vital submarine program hostage in order to squeeze more money out of the Government."
Rather than call the company's bluff, Hidalgo and Navy Secretary W. Graham Claytor tried to negotiate an agreement. The Navy even invited General Dynamics' help in persuading Congress to authorize funds for the overruns. In June 1978 the two sides made a deal. In the largest settlement of its kind in Navy history, the Pentagon agreed to swallow $484 million of the company's $843 million claim. Veliotis recalls that it was a "wonderful deal" for General Dynamics. Says he: "The Navy gave us the money up front for overruns we had yet to incur, so we had the use of those millions at a time when interest rates were high."
Hidalgo became Secretary of the Navy in 1979 and left the Pentagon when the Carter Administration departed in 1981. Within eleven months he was hired as an outside consultant for General Dynamics. Veliotis says that the company never specifically offered Hidalgo a reward for helping get it a good overrun settlement. But Veliotis contends there was an unspoken understanding that General Dynamics would take care of the Secretary in the future. Responds Hidalgo: "If anyone says that, I would call him a confounded and blasphemous liar."
Despite the $484 million settlement, the troubles at the Electric Boat division were not over. In 1981 the company's own inspectors discovered that workers had neglected to make critical welds in several submarines and covered up the errors with faked welding reports. The fiasco forced Electric Boat to reinspect all the welds and make repairs costing about $100 million. To recoup its loss, General Dynamics decided to turn to, yes, the Pentagon. The company argued that the Navy was liable for paying the repair bill under an obscure but standard clause in the submarine contract that called for the Government to act as an insurance underwriter in cases of worker negligence.
John Lehman, the new Secretary of the Navy appointed by Reagan, called General Dynamics' claim "preposterous." But Lehman found that General Dynamics had a strong legal case and soon began negotiating with Lewis. One of the Veliotis tapes contains Lewis' account of an inconclusive meeting that the chairman had with Lehman in the Secretary's office. As Lewis was leaving the Pentagon, Sawyer (the Assistant Navy Secretary who later took a job at General Dynamics) rushed up to the chairman's chauffeur-driven car and hitched a ride. According to Lewis, Sawyer said, "This is just between us. We've got to figure out a way to sit down here and negotiate some contracts." Two months later General Dynamics dropped its $100 million claim against the Navy. In turn, the Pentagon accepted the company's bid to build an additional attack submarine. Veliotis contends that a deal had been struck, but General Dynamics denies that there was any quid pro quo.
The submarine saga illustrates several of the alarming trends in the defense procurement business. The sheer size of the stakes--$100 million or more for a single sub--was enough to excite the greed and test the integrity of even the most well-meaning contractor. Says a former top Pentagon official: "Whenever you have so much money, you are going to have people doing a lot of reprehensible things to get the money. The sums are so huge now they pretty much defy control."
In addition, General Dynamics, more than perhaps any other company, has a tight symbiotic relationship with the Pentagon. It relies on Government contracts for 94% of its business, unlike other contractors, such as Boeing, that depend on the private sector for a sizable percentage of sales. Free from the competitive discipline of the marketplace, General Dynamics has found that pulling strings at the Pentagon can be more important than making products efficiently. The Pentagon, in turn, is dangerously dependent on General Dynamics. It is the only supplier of the Trident submarine and one of two contractors for the SSN 688 attack sub.
As last week's allegations against General Electric and United Technologies show, the charges against General Dynamics are not unique. But the company's pattern of problems indicates that those plaguing the entire industry are more complex and deep rooted--and far more important to solve--than an occasionally overpriced toilet seat or coffee maker.
With reporting by Christopher Redman and John E. Yang/Washington
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